Hawaii Insurance License Practice Exam

If an insured has two different insurance coverages, how is a loss payment calculated?

1. Each policy pays equally regardless of limits

2. One policy pays the full amount

3. Each policy pays pro rata

4. The lower policy pays the remaining balance

The correct answer is: Each policy pays pro rata

When an insured has two different insurance policies that cover the same loss, the calculation of the loss payment typically follows the principle of contribution. This principle dictates that each insurer will pay a portion of the claim relative to the coverage limits of their respective policies. In this case, pro rata means that if both policies are in effect, the payment for the loss will be distributed among the insurers based on the ratio of the limits of each policy to the total limits. For example, if one policy has a limit of $100,000 and the other has a limit of $50,000, and a loss of $120,000 occurs, the first policy would pay 66.67% of the claim (based on its limit) and the second policy would pay 33.33%. This ensures that the insured receives coverage according to the proportions of their respective policies, effectively sharing the financial responsibility for the loss. Understanding this method is crucial because it prevents the insured from profiting from multiple coverages for the same loss, thereby maintaining the principle of indemnity. In this context, the correct answer accurately reflects the standard operating procedure for calculating loss payments when multiple insurance policies are involved.